Tuesday, August 01, 2006

Preview of Adbe Systems (ADBE)' mid-quarter update

* JP Morgan notes that as they say Leopards can not change their spots, and the firm has felt that way with Adobe the last three years. They did not agree that Creative Suite somehow caused Adobe to stop being a product cycle company when the stock was flying high, and still believe the product cycle will be the main driver going forward. That means to us that the August quarter should be the bottom in fundamentals before getting better with launch of Acrobat 8 in November quarter.

Any remaining sluggishness should show up now, setting table for improvement: there is no doubt that May was a weak quarter, and macro environment as shown by Dell pre-results are still lackluster. But the firm believes whatever weakness might be left should be factored in when management does intra-quarter update tonight. Adobe's customers are loyal and tend to upgrade and with the largest revenue generating products being upgraded over the November 2006-May 2007 time frame they believe things will get better after the August quarter.JP Morgan continues their belief that a new Acrobat version plus seasonality likely provides about $50M of sequential lift in November, not the roughly $80 currently shown in consensus. So wthey think estimates still need adjustment before the stock can show steady improvement.They are expecting $594.4M/$0.26 compared to consensus of $593M/$0.26 for the August quarter.

* UBS notes that based on field checks throughout the quarter which showed continued softness in creative product sales ahead of the Spring 2007 new product rollout, they would not be surprised to see ADBE bias its guidance towards the low end of the range. On the Acrobat front, the firm expects typical seasonality to be slightly be more pronounced this Q, as the new version is set to ship in F4Q.

Firm is modeling the low end of that range for sales ($585m), but the high end ($0.27) for EPS as they expect more cost synergies as the Macromedia expenditures continue to get rationalized. This compares to consensus of $593m and $0.26.

While estimates could trend lower post the update, the firm believes the market is underestimating the revenue potential of the upcoming Acrobat product cycle but even more so underestimating the revenue upside checks lead them to believe is possible with the launching of its new creative offerings in the Spring of 2007.

Maintains Buy and $46 tgt.

Notablecalls: Wish we had some tier-2 firm upgrade the shares today gapping the stock up $50c. Would be a nice short. Think maybe the Prudential init with Overweight and $39 tgt will do.